First, your path to financial freedom is not paved with debt. You still need to create a realistic budget, check it often and revise as necessary. You still need to know where your money is going and to minimize debt as much as possible. This is especially so when it comes to credit card debt. You need to set financial goals and a strategy for achieving them.
But, there are some myths about debt that could be keeping you on the wrong track or causing you needless stress. In this article, we will look at the 5 most common myths.
5 Myths About Debt
- You can Save Money Using Credit Cards from Retailers.
This can be true, but only if you pay off the balance in full when it is due. The lure is exciting—interest-free and no payments for a year (sometimes), rewards and all sorts of other things that can trap you in a debt nightmare. These great-sounding rewards and benefits can also cause you to buy much more than you would. BUT, when the interest-free period comes to an end, if you are not able to pay off the balance due, you will be hit with interest on the entire amount you initially charged. And, this is usually a much higher rate than a regular credit card. If you want to take advantage of a retailer credit card, be sure to read the fine print. And, from the moment you make the purchase, begin to save money so that you can pay the bill in full when the time comes.
- It’s a Good Idea to Close Unused Credit Card or Line of Credit Accounts
You may have heard or read that closing old accounts will improve your credit score. This is one of the 5 common myths about debt. Your credit score improves, the longer your credit history. Assuming you made payments on time and did not have any problems with delinquencies, your older accounts will help your credit score. They will demonstrate your creditworthiness over a long period of time. Closing them will hurt your credit score.
- Making the Minimum Payment is Good Enough
If the best you can do is make the minimum payment, this is much better than skipping payments or allowing your account to go to collections. But, it is not good enough. Paying just the minimum means that you will be taking much longer to pay off the debt, and the bulk of your payments will go to interest. Paying just the minimum will also cost you in higher interest rates.
- Bankruptcy is the Only Way to Get Out from Under A Lot of Debt
Bankruptcy can be the only way to deal with overwhelming debt under certain circumstances. In an earlier article, we discussed bankruptcy and the various choices available to you. However, bankruptcy should be a last resort, not the first place you go. Filing for bankruptcy will hurt your credit score, and depending upon which chapter you file, it could take up to 10 years before it is removed. On the other hand, filing for bankruptcy is not a deal breaker when it comes to getting financing. Depending upon your circumstances, it might be better to apply for a debt consolidation loan. A P2P debt consolidation loan, for instance, can improve your credit score because all your debt is folded into one payment. The payments are automatic and made on-time.
- One Late Payment Will Not Damage Your Credit Score
This is not true, and it is the most popular among the myths about debt. Only one late payment can hurt your credit score, but there are prevailing factors. Most consumers don’t understand the definition of “late” when it comes to credit reporting agencies. First, the reporting of late payments lies solely with your creditor. It is not automatic, and if you take action to let your creditor know what is going on, you may escape the late payment report. In any event, your creditor cannot report a late payment until a full 30 days have passed since the due date. If you forget, but a week or two later remember, this will not count as a late payment. Your creditor may still impose a late fee and other penalties.
A new rule that was implemented last year requires the three main credit reporting agencies to wait 180 days before posting medical debt to your credit report. With the growing amount of medical debt, lawmakers sought to provide some level of relief to consumers. This 180-day grace period gives you time to negotiate the bill, make sure that all the charges are correct, or apply for one of the programs that assist consumers with paying medical bills.